Telangana High Court: Dispute concerning partners’ rights and obligations during insolvency and winding-up of partnership is arbitrable

The Telangana High Court (“Telangana HC”), vide its order dated April 14, 2024, in the case of Shameem Sultana Khan v. Faizunnissa Begum and Others [Arbitration Application No. 164 of 2023], has allowed an application for appointment of arbitrator under Section 11(6) (Appointment of arbitrators) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), in a dispute regarding settlement of accounts during winding up of a partnership firm.

Facts

A partnership deed was executed on April 1, 1994 (“Deed”), between Ms. Shameem Sultana Khan (“Applicant”) and Mrs. Faizunnissa Begum along with her family members (“Respondents”). Clause 19 of the Deed contained an arbitration clause which has been reproduced below:

“19. Should any dispute or doubt or question arise between the Partners in respect of the Partnership or its affairs in respect of any matter touching the construction or interpretation of any matter of this Deed, the same shall be referred to arbitration in accordance with the Law of Arbitration in force and applicable.”

The Applicant sent legal notices to the Respondents, seeking information, clarification and documents in relation to the firm. However, the claim of Applicant was denied. The Applicant thereupon issued another notice, informing the Respondents that the Applicant has dissolved the partnership firm under Section 43 (Dissolution by notice of partnership at will) of the Indian Partnership Act, 1932 (“Partnership Act”) and called upon the Respondents to settle their accounts.

Disputes arose between the parties regarding settlement of accounts. Subsequently, the Applicant invoked Clause 19 of the Deed and sent a notice to the Respondents, nominating a retired district judge as the sole arbitrator. The Applicant also published a notice in a daily newspaper stating that the partnership firm has been dissolved as required under Section 45 (Liability for acts of partners done after dissolution) of Partnership Act. Later, an application under Section 11(6) of the Arbitration Act was filed by the Applicant before the Telangana HC, seeking to appoint a sole arbitrator to adjudicate the dispute between the parties as per Clause 19 of the Deed.

Issue

Whether dispute related to insolvency and winding-up of partnership concerning partners’ rights and obligations is arbitrable.

Arguments

Contentions of the Applicant:

The Applicant submitted that the Respondents have not disputed the execution of the Deed and had not denied the existence of the arbitration clause. Therefore, the dispute that has arisen between the parties is required to be resolved in the manner agreed by the parties.

Contentions of the Respondents:

The Respondents submitted that the arbitrator’s power under the Deed is circumscribed and the relief to claim settlement of the accounts is outside Clause 19 of the Deed. The Respondents further argued that dispute relating to insolvency and winding up matters is a non-arbitrable dispute.

Observations of the Telangana HC

The Telangana HC observed that Section 16(1) (Competence of arbitral tribunal to rule on its jurisdiction) of the Arbitration Act provides that the arbitral tribunal may rule on its own jurisdiction. The Telangana HC also relied on Supreme Court’s (“SC”) judgment in Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited [(2020) 2 SCC 455], wherein it was held that the doctrine of competence-competence is intended to minimise judicial intervention, so that the arbitral process is not thwarted at the threshold when a preliminary objection is raised by one of the parties. It was further held that Section 16 of the Arbitration Act is an inclusive provision with a very wide ambit.

The Telangana HC also referred to a judgment by a seven-judge bench of SC in In Re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899 [2023 SCC OnLine SC 1666], where the SC held that, the scope of examination under Section 11(6A) of the Arbitration Act should be confined to the existence of an arbitration agreement on the basis of Section 7 (Arbitration Agreement) of the Arbitration Act. The SC noted that the validity of an arbitration agreement, in view of Section 7 of the Arbitration Act, should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing. The SC further observed that this interpretation also gives true effect to the doctrine of competence-competence by leaving the issue of substantive existence and validity of an arbitration agreement to be decided by arbitral tribunal under Section 16 of the Arbitration Act.

The Telangana HC held that all the objections with regard to jurisdiction of the arbitrator to deal with the claim made on behalf of the Applicant can be raised and can be urged before the arbitral tribunal itself. The Telangana HC, while referring to the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Limited [(2011) 5 SCC 532], held that the SC in this judgment, while referring to well recognized examples of non-arbitrable disputes, by way of illustration, referred to insolvency and winding-up of a company, whereas the instant dispute is between the partners under the Partnership Act.

Decision of the Telangana HC

The Telangana HC allowed the arbitration application and appointed a former judge of the SC as the sole arbitrator to adjudicate the disputes between the parties.

VA View:

In the present case, the Telangana HC reemphasized on the powers of arbitral tribunal to rule on its own jurisdiction provided under Section 16 of the Arbitration Act. The Telangana HC allowed the arbitration application of the Applicant after observing the existence of a valid arbitration agreement and also allowed the parties to raise any objections regarding the jurisdiction of the arbitrator before the tribunal itself. By doing so, the court has upheld the principle enshrined in the doctrine of competence-competence which is intended to minimize intervention by courts and to ensure that the arbitral process is not obstructed at the stage when a preliminary objection is raised by any party.

For any query, please write to Mr. Bomi Daruwala at [email protected]

Delhi High Court: Arbitration clause in the T&Cs on a website is binding on the parties if the digital agreement incorporates a hyperlink to such T&Cs

The Delhi High Court (“Delhi HC”), in its judgement dated April 23, 2024, in the matter of M/s. Oravel Stays Private Limited v. Nikhil Bhalla [FAO (COMM) 212/2023 & CM No.54229/2023], has held that an arbitration clause contained in the terms and conditions (“T&Cs”) available on a website is binding on the parties if the digital agreement incorporates a hyperlink to such T&Cs.

Facts

M/s. Oravel Stays Private Limited (“Appellant”) and Mr. Nikhil Bhalla (“Respondent”) had entered into a marketing and operational consulting agreement dated July 27, 2018 (“MOCA”) and had digitally accepted the same. By virtue of the MOCA, the Respondent was permitted to list his hotel, namely the Spruce Mansion (“Hotel”), on the Appellant’s online platform, which enabled the Respondent’s customers to book rooms at the Hotel through the Appellant’s platform.

As a part of this arrangement, the Appellant was entitled to receive a commission on the bookings made for the Hotel and was also obligated to pay the Respondent a minimum guaranteed remuneration every month. The T&Cs published on the Appellant’s website were incorporated (through a hyperlink) as a part of the MOCA, and Clause 15 (“T&C Clause of MOCA”) of the MOCA expressly provided that a party entering into the MOCA also accepts the T&Cs published on the Appellant’s website. Clause 14 (“Arbitration Clause in the T&C”) of the said T&Cs provided for resolution of disputes by way of arbitration. Pertinently, the T&C Clause of MOCA provided that the MOCA along with the T&Cs available on the Appellant’s website would constitute the entire agreement between the Appellant and the Respondent.

A dispute arose between the Appellant and the Respondent in relation to the Appellant’s failure to pay the minimum guarantee amount and the other incentives payable by it to the Respondent under the MOCA. Consequently, the Respondent instituted a suit before the commercial court (“Commercial Court”) seeking a recovery of arrears amounting to INR 9,65,656, along with future interest (at the rate of 24% p.a. till realization) and damages to the tune of INR 4,00,000, from the Appellant. In response to the same, the Appellant filed an application under Section 8 (Power to refer parties to arbitration where there is an arbitration agreement) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), with a prayer to the Commercial Court to refer the parties to arbitration.

While the Commercial Court accepted that an arbitration agreement existed between the parties in terms of the Arbitration Clause in the T&C incorporated as a part of the MOCA, it rejected the Appellant’s application by passing an order dated September 11, 2023 (“Impugned Order”), on the grounds that the Arbitration Clause in the T&C was confined to cover only those disputes that related to the ‘construction, interpretation and application’ of the terms of the MOCA and did not extend to disputes relating to non-compliance of the terms thereof. Aggrieved by the Impugned Order, both the Appellant and the Respondent filed appeals under Section 37(1)(a) (Appealable orders) of the Arbitration Act, before the Delhi HC.

Issues

• Whether the Commercial Court had erred in proceeding on the basis that an arbitration agreement existed between the Appellant and the Respondent.
• Whether the dispute between the Appellant and the Respondent was an arbitrable dispute within the scope of the Arbitration Clause in the T&C.

Arguments

Contentions of the Appellant:

The Appellant contended that the Commercial Court had erred in concluding that the disputes between the parties were not covered within the scope of the Arbitration Clause in the T&C. The Appellant further submitted that the Commercial Court had failed to appreciate that the expression ‘application of the terms and conditions of the agreement’ in the MOCA, included within its ambit any dispute relating to the non-compliance of the terms thereof.

Hence, any dispute concerning the failure to discharge any obligation under any clause of the MOCA would necessarily be covered under the scope of ‘application’ of the clause imposing such an obligation.

The Appellant submitted that the Arbitration Clause in the T&C delineated 3 different expressions namely ‘construction, interpretation and application’, and contended that the Commercial Court had erred in interpreting the scope of the word ‘application’ as similar to the term ‘interpretation’. The Appellant concluded its arguments by submitting that a dispute on whether a clause was applicable would also include a dispute regarding the performance of the obligations thereunder.

Contentions of the Respondent:

The Respondent submitted that it was aggrieved by the Impugned Order to the extent of the Commercial Court’s finding that an arbitration agreement was contained in the MOCA digitally signed between the parties. The Respondent relied on the decision of the Hon’ble Supreme Court (“SC”) in the case of M.R. Engineers and Contractors Private Limited v. Som Dutt Builders Limited [(2009) 7 SCC 696] (“M.R. Engineers Case”) in order to submit that the incorporation of an arbitration clause in an agreement could not have been inferred by reference, unless the agreement specifically contained such arbitration clause therein. Therefore, since there was no specific reference to an arbitration clause contained in the T&Cs, the same could not have been considered as a part of the MOCA.

The Respondent submitted that merely clicking on the link provided in T&C Clause of MOCA did not direct a party to the T&Cs published on the website of the Appellant. The Respondent also submitted that the Arbitration Clause in the T&C related specifically to ‘channel partners’. Thus, unless a party selected a ‘channel partner’ from the menu that opened upon clicking the link provided in T&C Clause of MOCA, such party would not be directed to the site containing the relevant T&Cs published on the Appellant’s website.

Therefore, a party was not only required to click the hyperlink set out in T&C Clause of MOCA but also to take an additional step of selecting a ‘channel partner’ from the menu, which would then lead the party to the Arbitration Clause in the T&C.

The Respondent agreed with the Commercial Court’s finding that the Arbitration Clause in the T&C did not extend to disputes concerning non-compliance of the terms of the MOCA, and submitted that there was no dispute as to the interpretation of the MOCA. Rather, the claims made by the Respondent before the Commercial Court, pertained to the recovery of amounts, which were due and payable to it under the MOCA. The Respondent submitted that non-payment of the amounts due to it under the MOCA, could not be considered as a dispute regarding application of any of the clauses of the MOCA.

Observations of the Delhi HC

While considering the issue on whether the Commercial Court had erred in its finding that an arbitration agreement existed between the parties, the Delhi HC observed that it was undisputed that the parties had digitally entered into the MOCA and that the T&C Clause of MOCA expressly provided that a party entering into the MOCA would also be accepting the T&Cs published on the Appellant’s website. Thus, the MOCA expressly referred to the T&Cs published on the Appellant’s website and also set out the link to access the same.

The Delhi HC observed that Section 7(5) (Arbitration agreement) of the Arbitration Act provides that a reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if such contract is in writing and the reference is such as to make that arbitration clause part of the contract. Hence, in Delhi HC’s view, the T&Cs published on the Appellant’s website was expressly incorporated as part of the MOCA, and therefore, the Arbitration Clause in the T&C would stand incorporated as part of the MOCA.

The Delhi HC observed that in the M.R. Engineers Case, relied upon by the Respondent, the SC while explaining the difference between reference made to another document in a contract and incorporation by reference of another document in a contract, had opined that while in the first instance the parties only adopt certain specific portions or parts of the referred documents for the purpose of the contract, in the second case the parties incorporate the referred document in entirety into their contract. The Delhi HC observed that in the present case it was clear that the T&Cs published on the Appellant’s website, which included the Arbitration Clause in the T&C, stood incorporated as part of the MOCA.

The contention of the Respondent that the link mentioned in the T&C Clause of MOCA did not directly lead to the T&Cs published on the Appellant’s website was not acceptable to the Delhi HC considering that the Respondent being a ‘channel partner’ of the Appellant was required to consider the T&Cs as applicable to channel partners as incorporated in the MOCA. By virtue of the T&C Clause of MOCA, the T&Cs (published on the Appellant’s website) as applicable to channel partners stood incorporated in the MOCA, by reference.

While considering the issue on whether the dispute between the parties fell within the scope of the Arbitration Clause in the T&C, the Delhi HC observed that the Respondent had, in its plaint filed before the Commercial Court, sought recovery of arrears along with future interest and damages.

A contest to the said claims would involve the question whether the said amounts were payable in terms of the MOCA, and if so whether the Respondent had suffered any damages on such account which he was entitled to recover. The dispute whether the Appellant was obliged to pay the amount, would also involve the question as to ascertaining the rights and obligations of the parties under the MOCA. This too, would involve the question as to construction and interpretation of the MOCA.

The Delhi HC observed that once a court has come to the prima facie conclusion that an arbitration agreement existed between the parties, the question whether the disputes involved are arbitrable under the said agreement was required to be examined by the arbitral tribunal in the first instance. The Delhi HC placed reliance on the judgement of the SC in the case of Vidya Drolia and Others v. Durga Trading Corporation [(2021) 2 SCC 1], wherein the SC had opined the court’s role at the pre-referral stage (including under Section 8 of the Arbitration Act), is a prima facie examination to determine the existence of an arbitration agreement and/or arbitrable disputes. Detailed examination is the arbitrator’s role.

Reliance was also placed on the case of BSNL v. Nortel Networks (India) Private Limited [(2021) 5 SCC 738], wherein the SC had opined that it is only in cases where there is no doubt that disputes are not arbitrable, that courts would refrain from referring the parties to arbitration.

In Delhi HC’s view, the disputes between the Appellant and the Respondent were arbitrable and did not fall outside the scope of the arbitration agreement (that is, the Arbitration Clause in the T&C).

Decision of the Delhi HC

In view of the above, the Delhi HC referred the parties to arbitration and terminated the suit filed by the Respondent before the Commercial Court.

VA View:

Through this judgement, the Delhi HC has rightly held that the T&C Clause of MOCA clearly incorporated the T&Cs published on the Appellant’s website, including the arbitration clause therein, into the MOCA, since the statutory position under Section 7(5) of the Arbitration Act is clear that a reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the reference is such as to make that arbitration clause part of the contract.

The Delhi HC has correctly opined that the disputes raised by the Respondent in his suit before the Commercial Court, concerning the Appellant’s failure to pay amounts due under the MOCA, involved interpreting and applying the terms of the MOCA, thereby falling within the scope of the arbitration agreement. By validating the incorporation of arbitration clauses through hyperlinks in the website of the concerned party, the court has set a clear precedent that upholds the enforceability of modern digital contracts.

For any query, please write to Mr. Bomi Daruwala at [email protected]